High-end Drinks Market Improving

April 20/Business Monitor International (BMI) -- The super-premium drinks sector has been particularly hard hit by the global economic downturn, having been impacted by trading down and a shift in sales from the on-trade to the off-trade. However, the market is showing signs of recovery, with premium focused producer LVMH reporting strong results for its fiscal first quarter and the world's largest drinks firm Diageo reporting "green shoots" at the top of the spirits market. While BMI recognizes the long-term potential of the sector, it remains cautious about the strength of the current recovery, with a core view being that many consumers in developed markets have yet to feel the full effects of the global financial crisis.

LVMH has reported revenue growth of 20% at its wine and spirits division for the three months to the end of March. Sales were boosted by an increase in demand for Champagne and Cognac. However, the division was boosted by restocking and weak comparable figures, with the first quarter of 2009 marred by the recent onset of the financial crisis, meaning that it is probably unwise to read too much into a single quarters figures. This view is supported by the fact sales at the division in Q110 remained below the level recorded in the same period of 2008.

Signs of recovery have also been noted at Diageo with the company's chief marketing officer Andy Fennel reporting that sales of spirits costing more than $10 a bottle in the U.S. market had "started to rebound over the last 12 weeks." However, Fennel also revealed that the market in Europe remained more mixed with signs of recovery in France, the U.K. and Germany contrasted with continued weakness in Spain, Greece, Ireland and Portugal. It is notable that both Diageo and LVMH have expressed caution, with LVMH stating that it was too early to draw conclusions for the rest of the year and Diageo suggesting that developed economies are still 'fragile'.

This caution has been a notable feature throughout the food, drink and retail sectors and can be traced to the fact that many consumers have yet to be hit in the pocket by the downturn. A rapid drop in interest rates, monetary expansion and the delaying of tax rises and spending cuts has so far cushioned the impact of the financial crisis for many consumers. However, with these factors set to unwind from 2010 into 2011, the strength of the current consumer recovery remains far from assured. As such BMI is  currently forecasting that the next 12 months will continue to be difficult for many producers, with most growth over the period likely to be attributed to base effects rather than a resumption of a strong premiumization trend.

From the April 26, 2010, Prepared Foods E-dition